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Insurance brokers are using many terms to describe the commercial insurance market's current condition, but unless you're placing a property risk sitting in a catastrophe zone, “hard” is not one of them. Still, the absence of a major disaster so far this year — coupled with higher prices for property-catastrophe risk — is liable to result in sky-high insurer profits, likely prompting increased competition among insurers in the year ahead, producers say.

Even worse — for sellers, not buyers — not satisfied with competing against one another, the appetite of standard lines carriers is growing to include markets they had shied away from, brokers suggest.

However, with capital allocation still relatively tight (especially on the reinsurance side), as well as serious concern that Washington will allow the federal terrorism reinsurance backstop to expire next year, some say prices could rise and coverage tighten up for certain lines and accounts. And any market softening will be brief if Mother Nature unleashes another major catastrophe or terrorists strike again, producers warn.

For now, however, three recently released reports underscore the continued pricing decline in the market. The quarterly survey of pricing trends by the Council of Insurance Agents and Brokers, performed in conjunction with Lehman Brothers Equity Research, shows an average commercial rate decrease of 5.3 percent during the third quarter of 2006.

The same report shows a continued downward trend for the past five quarters — going back to the third quarter of 2005 when rates dropped an average of 8.2 percent. Since then, rates have fallen in each quarter, with the first quarter of this year showing the smallest decrease — at 2.7 percent.

Meanwhile, the third quarterly “Benchmark Survey” prepared for the Risk and Insurance Management Society by Advisen Ltd. confirms that rates continue to decline, following downward trends in the previous two quarters. The only line to show any increase was property (at 1.7 percent) — although properties in hurricane- and earthquake-exposed regions have seen far sharper increases.

There is no letup for the softening market in sight, Advisen observed, with the property-casualty insurance industry's underwriting profits heading for record levels, and with industry surplus increasing 2.7 percent. Additional capacity would likely fuel competition, translating into even lower premiums down the line, Advisen observed — provided that capacity is not eaten up by another major catastrophe.

The third study — October's “barometer” from MarketScout, an online insurance exchange based in Dallas — found p-c rates down on a composite basis just short of double-digits at 9 percent. “As predicted, the absence of hurricane activity has extended the soft market,” said Richard Kerr, chief executive officer of MarketScout.

Offering further evidence of decline, Paula Sullivan, a principal at New York-based insurance broker Integro, told National Underwriter that professional liability — primarily the medical malpractice area — for the first time in five to six years was heading for a combined ratio below 100, helping to support rate reductions.

Among insurance brokers, there appears to be little disagreement over the direction the market is taking — down.

J. Hyatt Brown, chairman and CEO of Daytona Beach, FL-based Brown & Brown reported that, overall, premium rates are down as much as 15 percent in some cases — except for coastal property accounts in Florida, Gulf Coast states and Texas.

He said carriers were telling him prices on renewal business are down 3 percent to 5 percent — although he feels those figures do not reflect deeper cuts enjoyed by accounts lost to competitors over price.

The benign hurricane season has bolstered capacity a bit in Florida, but pricing is competitive elsewhere, observed David L. Eslick, chairman and president of USI Holdings Corp., while reporting on his firm's third-quarter financial results in early November.

Opinion was mixed at last month's meeting of the CIAB membership.

“People are always focusing on the anomalies,” said Martin P. Hughes, chairman of Chicago-based Hub International Ltd., adding he felt the industry is in good shape. However, he conceded that a continued downturn in premiums would affect a broker's organic growth.

He did not believe the market would be as bad as the radically soft years of the prior two decades due to the pressures rating agencies are exerting on insurers to keep their finances in order.

J. Patrick Gallagher, president of Itasca, IL-based Arthur J. Gallagher & Company, was less optimistic, saying prices will “soften like crazy” and predicting the market would resemble the 1990s — except on catastrophe risks.

David H. Prieb, head of global specialty operations of the European arm of reinsurance broker Guy Carpenter & Company, a subsidiary of New York-based Marsh & McLennan Companies, said risks in peak catastrophe zones remain undercapitalized by some $8 billion — despite an infusion of money and lack of catastrophe claims.

“It will be interesting to see 2007, if the industry will remember the lessons of the past or fall back into a trap that would cause them structural problems,” he observed.

John L. Lumelleau, president of Kansas City, MO-based insurance broker Lockton, said insurers know they dodged a bullet this year with the mild hurricane season. However, they remain cautious in their underwriting, he added.

“No one knows what next year will be like,” he remarked, categorizing the market as relatively stable, but noting that insurers are very concerned about losing market share — which could spur more competition and deeper price-cutting.

Diversification of their books is a major driver for insurers — especially those with heavy property exposures, according to Grahame Millwater, chairman of Willis Re. Rating agencies and new risk models identifying more exposures than insurers thought they had in coastal areas are prompting insurers to better spread their portfolios.

However, “companies are hungry for business,” he said, leading carriers to have a lot of discussions with brokers in the pursuit of new markets.

With Jan. 1 renewals, some of the executives queried believe reinsurers will try to get increases equal to July 1 levels — but their superior financial performance might make that difficult to achieve, he added.

However, although prices are coming down, insurers are not ready to give away the store, brokers contend.

In one of its ongoing series of discussions about the insurance market, “The New Reality of Risk,” Tony Tam, managing director in Marsh's casualty practice, said the competitive market on the casualty side would likely continue through 2007. But he added that insurers are still exercising discipline — demanding complete forms and excluding uninsurable risks, such as asbestos, silica, lead, mold and other troublesome exposures.

While prices have come down as much as 10 percent in general on commercial lines, those with favorable loss history or high retentions can see even more significant price decreases, he said.

Partly fueling the capacity expansion is the fact that insurers are getting into programs they shied away from in the past, while offering terms and conditions more advantageous to insureds — including three-year programs, he said.

There is growing flexibility in workers' compensation programs, he added.

“In general, clients can continue to achieve improvements in their programs,” said Tam. “The opportunities can be maximized through an early and thorough renewal strategy process.”

While the general scenario appears positive for buyers, the specter of terrorism looms on the horizon, potentially disrupting the entire marketplace — although natural catastrophes remain more of a concern for insurers than the man-made variety.

“Terrorism has taken a backseat to natural exposure issues on renewals,” said Aaron Davis, director of Aon's national terrorism and property resource practice. “But I believe it will be quick to re-emerge as an issue on price and capacity in 2007.”

Mr. Davis explained that on 2007 renewals, buyers will have to contend with the possibility of a world without a federal reinsurance backstop for terrorism risks going into 2008.

Buyers will have to turn to the private market, which will not be able to replace the Terrorism Risk Insurance Act's reinsurance safety net, brokers noted, given the fact that there is not nearly enough capacity for all the exposure that would need to be covered.

He said the market would have to be increased four times from its current capacity for risk managers to exert any buying power in the terrorism risk market.

“The market is still very tender,” he said. “If there were a significant event — even a quake or a strong hurricane — it would be hard to imagine the implications of that not getting worse, and events would happen very rapidly.”

Even on the casualty side, while lines are trending downward, Bob Terracciano, principal in the casualty practice for Integro, noted that high concentration of workers have insurers concerned about workers' compensation exposures.

While it is too early to tell what insurer reaction might be, they are watching the course of TRIA carefully, trying to figure out what to do if there is no backstop in 2008. “The big question is, where is the new capital?” Mr. Marchitello said.

Mr. Davis pointed out that for practical purposes, only multiline carriers could conceivably come into the market because they would have the capital that rating agencies would require to maintain their superior grade.

HARDI to Develop Business Insurance Renewal Toolkit

Heating, Airconditioning and Refrigeration Distributors International (HARDI) is striving to help make one of the most tedious but important annual business practices easier for HVACR wholesale distributors and suppliers. Annual business insurance renewal processes are often last-minute, rushed and incomplete due to the complexity involved in completing a thorough annual review of business insurance coverage and the often-confusing language in the insurance world. As a result, many small and midsized businesses don't adequately shop for or compare business insurance options and often simply remain with their current carrier because it is the easiest thing to do.

HARDI's Insurance & Risk Management Committee, co-chaired by Jim Luce of Luce, Schwab & Kase Inc., Fairfield, NJ, and Lance Malone of Standard Supply & Distributing Co., Dallas, TX, is developing a toolkit that will streamline and automate members' annual renewal process. The Committee says this will result in far less time needed to complete a thorough annual renewal process that will yield better and more cost-effective business insurance coverage options. With this toolkit, employees with little to no insurance experience will be able to provide answers to basic questions about their company that they can share with any insurer for a comprehensive quote on most business insurance coverages. The Committee's goal is to have this toolkit available to members by fall 2007, in time for most renewal periods that begin in January 2008. For more information, contact HARDI Vice President Talbot Gee at 614/488-1835 or [email protected].

Where Do We Stand?

CIAB's third-quarter survey found the average industry decline at 5.3 percent, but MarketScout's “barometer” for October showed rate cuts approaching double-digits at 9 percent.

Advisen's Benchmark Survey for RIMS found that the only line to show any increase was property (at 1.7 percent), with stiffer hikes endured by those in disaster-prone areas.

With capital flooding the market and catastrophe losses relatively small, insurers are heading for potentially record industrywide profits, putting more pressure on pricing.

Catastrophe risks remain hard to place for those exposed to hurricanes and earthquakes, with little relief in sight — although there are signs of stabilization.

Terrorism and natural catastrophe losses continue to spook underwriters, with not enough capacity to cover either risk — especially for terrorism, with expiration of TRIA's federal backstop looming.